Goldman Sachs: Worth $126 Once Market Settles Down

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GS: Goldman Sachs logo
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Goldman Sachs

This past year has been one of Goldman Sachs’ (NYSE:GS) toughest years since going public in 1999 with the global investment bank posting only its second-ever quarterly loss in Q3. The global economic slowdown and the debt situation in Europe hammered Goldman’s revenues in the quarter – and with the company’s only other quarterly loss coming in 2008 at the peak of the global financial crisis – fears of a double-dip recession have continued to weigh on investor sentiment. This can largely explain why the bank’s shares, which were trading above $170 at the beginning of the year, have slumped to their current sub-$100 levels. Investment banking competitor Morgan Stanley’s (NYSE:MS) shares have suffered a similar fate. But all things considered, we believe that the bank’s stock is worth much more than than the current market price.

We recently revisited our forecasts for the bank and revised our price estimate from $137 to $126, and detail below the reasons for this revision.

See the full Trefis analysis for Goldman Sachs

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Sales & Trading Operations Have Suffered

More than half of Goldman Sachs’ quarterly revenues are usually attributable to its debt and equity trading businesses. Our analysis of the bank reiterates the importance of its trading operations, as we estimate that debt and equity trading operations contribute about 32% and 16% of its value, respectively. Volatile market conditions led to the rare loss in the third quarter. While the bank has cut down its exposure to the riskiest European economies, the risk remains that the debt issues could spread and further impact global economic conditions. We therefore expect Goldman to be more risk-averse in its trading operations over the next few quarters.

We have revised our previous forecast for Goldman’s trading assets as we expect near-term asset growth to be slower than previously estimated due to more risk-averse trading strategies and subsequent lower returns. The implementation of regulations restricting proprietary trading activities will also likely hinder asset growth. Additionally, with global markets expected to remain challenging over the next few quarters, yields for the bank’s FICC trading business will also likely see a decline – which we have incorporated in our analysis.

Asset Management Business to Slow Down as Well

The global slowdown has also hit the asset management business for all banks, with total assets under management (AuM) on the decline in recent quarters. With this trend likely to continue in the near-term, our previous estimate of 6% annual growth in AuM have been revised downward to a more conservative 3% annual growth.

We assume that as European leaders get their fiscal house in order and organize a convincing plan for how to better tackle the continent’s debt requirements, we should see the sales and trading business recover. Goldman should be one of the prime beneficiaries once financials regain their footing.

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